Manhattan Real Estate: New York City Real Estate Tips

Working With Sellers In A Changing Market

2009-07-08T14:54:33Z

(Christine Toes here) Many buyers think that when an apartment is not priced correctly, it's always the broker's fault. Check out this example of a situation where the price has nothing to do with the broker: Apt is on Madison in the 30s - originally priced at $459K on 2/23/09: On 5/1 - price reduced to $399K, resulting in multiple offers, but after five open houses my buyers "won" at approx $400K. Within about 10 days, the buyer's attorney received the offering plan, financials, read the board minutes & negotiated the contract. The buyers signed the contracts and sent a check to the seller's attorney, who received them on 7/2. Morning, 7/6/09: seller decided not to sell and to put the apartment back onto the market at $429K. The seller's broker spent an hour trying to talk the seller out of his decision (discussing the market conditions, how qualified the buyers are, that it was already on the market at $459K and if someone was going to pay $420K for it, they would have already gotten those kinds of offers, there's another apartment in the building for $385K that's not selling, sent the seller comps, etc). Afternoon, 7/6/09: My customers didn't really want to go through the process all over again and hadn't seen anything they really liked for that price. They don't live in NYC so they'd have to fly back here to start their search again. They increased their offer by $10K to approx $410K. 7/7/09: seller decided that he really wants $469K for the apartment and is putting it back onto the market for $469K! What do you do when you're the broker in this kind of situation? This would be the point where, if it were my listing, I would say "thank you for the opportunity, I'm sorry we don't see eye to eye on this situation, please keep me in mind for the future if you change your mind." And then I would walk away. (By the way, this is an estate sale). All I can say to the buyers is... "It wasn't meant to be, don't worry, we will find something better." I will also send a letter to everyone in that line or similar lines in the building to see if anyone is thinking of selling their apartment - just in case, you never know! Moral of the story is - if you see a listing with: a. Price decreases and increases; or b. That has been on and off of the market for several months/years; or c. There have been several brokers You might want to steer clear because the seller may be flaky or not that serious about selling under a certain price. The nice thing about sites like Streeteasy is that the price history for every apartment is more transparent. Keep in mind that streeteasy is not always 100% accurate - I have heard several brokers panic because their brand new listing shows up on streeteasy as having been on the market for a few hundred days, so while transparency is improving, perfection is very hard to achieve for this industry with no standardized MLS system. It never hurts to ask the seller's broker how long the apartment has been on the market when you're in the apartment. Also ask your own broker what the price history of the apartment is. It is always good to compare notes and you can get a sense of how honest brokers are by their responses. In the end, nobody can force a seller to execute a contract and you do what you can with your client's best interests in mind.

Holes in The Dike

2009-07-06T19:48:52Z

I have noted several times in the past that the commercial real estate market decline is a continuing major challenge to the banking industry (especially regional and local banks) and, as a result, a continuing stumbling block for the economy as a whole. I have laughed along with you at the new industry maxim that "a rolling loan gathers no loss" and averred that pushing the problems out further in time is not a recovery strategy. I just read about a recent big metropolitan area distressed sale that got me thinking about how the constipation of the commercial real estate market may be beginning to ease...I won't take the analogy to it's logical conclusion, but suffice it to say that I think the market clearing adjustment to the downside is under way, and I believe I can put some logic behind my intuition that trying to hold onto properties that are marginally servicing debt and/or have no equity value in a refinancing scenario is a doomed strategy, even if the economy doesn't get a lot worse. According to Globe Street, Realty Finance Corp. has sold an original $47 million loan on a Class A office building at 250 Montgomery Street in San Francisco for approximately $25MM. The building was reportedly only 55% occupied, so obviously debt service by the borrower, Lincoln Property Co., was an issue. What was really interesting was the reason given for why the lender, Realty Finance Corp. (who received the property back through a deed in lieu of foreclosure) turned around and sold the loan so quickly at a huge haircut. The article reports that according to SEC filings, Realty Finance's $1.2 billion investment portfolio, which has lost 26% of its value since the start of 2008, is encumbered by non-recourse long-term financing through two CDOs. It also noted that in February the company was notified that it failed the overcollateralization test for one of the CDOs and that payments were being diverted from the firm to pay down principal of senior bondholders. The firm also expected a similar result for the second CDO some time in 2009, resulting in minimal incoming cash flows to its primary business. So here we see a distressed property, being handed over by an owner to a leveraged lender, who immediately must sell the asset at a market clearing price. As I heard at the IMN Conference, fund level leverage exists up and down the real estate finance and investment business. This will be a significant catalyst of distressed sales as property owners start to default on their loans. Okay you say, but this is only an example of a building that is distressed being puked up at a big discount, it's not just a property someone overpaid for.....like so many out there. Why should banks cough up the latter if they are not absolutely forced to? Why is their first sale likely to be their best sale? What we have to do is look ahead at how the new owner of 250 Montgomery Street is likely to act. The new owner has not been disclosed in this case, but is said to have been another real estate private equity firm. This firm now has a great new basis cost in the building and lots of incentive to be aggressive in getting it leased up. This is the transmission mechanism whereby lower rents are enabled in a market due to distressed properties being turned over at a much lower prices. It just doesn't take a lot of this kind of activity in a soft market with high vacancy rates to crush rents. So not only does the "new mark" caused by the transaction, in this case about $200 per square foot, versus a late 2006 purchase price of approximately $405 per square foot, hurt the valuation of banks' interests in loans on similar properties, it will eventually end up hurting cash flows across all their properties as the general rent level declines. According to another Globe Street article, across the country in Florida, Ashkenazy & Agus Ventures recently foreclosed on a mortgage note they were said to have acquired on Downtown at the Gardens, a high-end mall in Palm Beach Gardens. Institutional Mall Investors, a joint venture between Miller Capital Advisory and Calpers, was said to have defaulted on the mortgage on the property, which they reportedly acquired in 2007 for $200 million. The mortgage note was said to have been acquired for $48 million, or about 35% of the original principal amount from TIAA CREF. It is speculated that Institutional Mall Investors will lose $60 to $90 million on the deal. With the mall, which has suffered the loss of several tenants, eventually landing in new hands at a lower basis cost, my guess is that rents will be lowered to get some tenants into the open space. This situation certainly underscores the idea that your first sale may be your best sale, since Downtown at the Gardens is the second Palm Beach County mall to be foreclosed on recently after JP MorganChase foreclosed on the 1.2 million square foot Palm Beach Mall, suggesting yet another player in the market with a new lower basis cost and ability to discount to fill space. The real estate financial market, like other financial markets, is like a permeable membrane: when the concentration of debt on one side gets too high, diffusion restores equilibrium. Fighting the restoration of equilibrium is a losing game, and it looks like the membrane is becoming quite porous in a few places. Here in Manhattan we are seeing "distressed on distressed competition," but we may soon see (low basis cost) "blessed on distressed competition." In my recent piece I noted that the William Beaver House was doing some creative things to catalyze sales of units to investors. Nearby, 45 John Street, a project that has suffered from significant construction delays, is said to be facing foreclosure by lender BayernLB. According to The Real Deal, because units in the building wouldn't start closing by July 1, 2009, buyers in contract would have rescission rights. I wonder how the already fragile downtown condominium and rental markets will react if any of the troubled projects there eventually fall into the hands of someone with a really low basis cost?

Manhattan's Slowdown Defined By Sluggish First Half Sales

2009-07-06T15:48:02Z

A: There was a reason I used the statement...'the first two quarters of 2009 will prove to be the most sluggish in the past 10 years' in Mid May. It takes 2-3 months, sometimes more if there are bottlenecks with underwriting of the loan or processing of the board package by the management company or board, to close on a co-op or condo; this is more the case with co-op sales as condo transactions can usually go from contract signing to closing within 2 months. So, there is a lag between what we brokers see out there in the field, in real time, and the quarterly reports that are released to the public. This lag usually paints a misleading picture of a market that reflects what the report states; this go around is a great example as the headlines certainly didn't exemplify the activity going on for the past few months. Take a look at the graph I composed comparing Manhattan Co-op + Condo Sales by quarter, over the past 10 years - clearly showing the parabolic boom in 2007 which marked the euphoria stage of the credit/housing bubble for Manhattan! In doing so, the wave down in prices for Manhattan is visualized by the first half total number of sales - which really reflects the marketplace 2-3 months prior! Here is the chart showing you the parabolic boom in 2007 sales volume and the sluggish aftermath of a market that saw bids disappear starting in the 4th quarter of 2008 after Lehman's collapse! The real time market took 2-3 months to show up in this closed sales data - reflecting the lagging nature of our marketplace from contract signing (which brokers use to gauge activity) and closings (which these reports reflect)! *data courtesy of MillerSamuel Quite telling isn't it. It basically defines the wave down in prices to the latest comfort zone that we all experienced since late 2008. This is what happens when bids disappear, proving once and for all, that its all about the buyers! What this chart does NOT reflect is the month by month acceleration in action that took place starting around mid April, and lasting until end of June or so! Time will tell if the action continues! The reasons for the pickup in activity were discussed in my less bearish piece on June 4th: 1) first wave down to comfort zone - definitely the most important. Tiered structure of correction due to nature of this recession with sharpest adjustment in high end and slightest adjustment in studio market 2) equity rally - the S&P is up about 40% in the past 12 weeks and that is boosting confidence; remember, the stock market is the stars and the most widely used gauge as to the overall health of our economy. The banks raised a ton of money, and the fed engineered the system to make banks profits soar. But a) will it last and b) what about higher quality debt classes still on and off balance sheets? 3) reflation trade - rates, stocks, commodities are all rising at the same time as a reflation trade is in place from massive fiscal/monetary stimulus. Many like to be in real estate to protect them from massive inflation and a devaluation of our currency. Time will tell if wage inflation and job growth occurs as onset of inflation hits. 4) rates - the combination of lower prices, confidence boost from equity rally, reflation trade, and possibility of higher rates is making many feel more comfortable to pull trigger to lock in price and low borrowing costs. Its very possible the next wave down is a result of another round of severe illiquidity because lending rates are significantly higher than what we got used to over the past 5-6 years. The question is, what happens next. I'll delve into thoughts on this when I have time. For now, I have to r-u-n-n-o-f-t on appointments!

Manhattan Q2 Report Thoughts

2009-07-02T15:54:07Z

A: Due to the lagging nature of these quarterly reports, nothing disclosed here is a surprise; at least not if your reading UrbanDigs.com! The biggest mistake one can do is to read one of these quarterly reports, and just assume this is exactly what is going on right now! The thing is, the market today is significantly more active than what this report suggests because Armageddon has been priced OUT of this marketplace over the past 7-9 weeks or so - something not reflected in this report. When you hear, 'sales volume plunges 50% from year earlier', you may immediately assume today's market is completely dead - not so. So, make sure you understand this lag and acknowledge that this market did equalize from the frozen months of OCT - MARCH. The bulk of the pickup in activity occurred between mid-April to end of June - as confidence rose with the equity rally and a wave down in prices. The telling aspect of this report lies in the y-o-y price declines reported by price point - something that I reported to you as early as March 9th, ironically the day the stock market hit its most recent lows. At least I feel good that my reporting to you guys is both accurate and timely. I will do my best to continue this front line reporting mixed with macro economic thoughts going forward as there is always something to talk about when it comes to Manhattan real estate. Lets discuss price first, and then move onto sales volume. In early March, right at the height of the fear and the top of the severe illiquidity since Lehman's collapse, I wrote a piece called "Understanding 'Liquidity', or Lack Thereof For Manhattan" to describe what I was seeing out in our marketplace - note, this is before the equity rally and shift in psychology from Armageddon to Reflation that occurred (whether you like it or not or buy into the sustainability of it or not):

Right now the market seems illiquid because the bid-ask spread is too wide creating a disconnect; meaning that either sellers are still in denial about the price drop of their asset (current market value) OR buyers are too cautious to bid more aggressively for the asset. This is really a high end recession in the Manhattan real estate market, that is rippling through to the lower price points. That is the best I can describe it. If I were to divide Manhattan into a few categories and where deals seem to be happening now, it would be something like: HIGH END ($5M+) - down aprox 25% - 40% from peak HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak MID END ($1M - $2M) - down aprox 20% to 30% from peak LOWER END (Under $1M) - down aprox 15% - 25% from peak

Remember, we will have to go through Armageddon price discovery first, before we see the slightly higher deals that took place over the course of the 7-9 week confidence/reflation shift. We are seeing the beginning of this now, but expect it to last a few more quarters on the pricing side. Fast forward to today and Bloomberg reports on Manhattan's Q2 Report, "Manhattan Apartment Prices Drop as Lehman Effect Hits Home":

Manhattan apartment prices dropped for the first time since 2002 in the second quarter as the collapse of Lehman Brothers Holdings Inc. and Bear Stearns Cos. caught up to property owners in the nation’s most expensive urban market. The median price fell 18.5 percent from a year earlier to $835,700, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today. The number of sales plunged by half, the most since Miller Samuel began keeping data in 1989. The price of studio apartments declined 16 percent from a year ago to a median of $405,000, according to Miller Samuel. One-bedrooms dropped 17 percent to $650,000 and two-bedrooms fell 23 percent to $1.27 million. Three-bedroom units fell 37 percent to $2.35 million and four-bedrooms plummeted 47 percent to a median of $3.92 million.

Notice that last paragraph that discusses the structured effect of this slowdown on each price point and compare that to what I reported to you guys in early March! You want to keep it real, keep it here! Now, lets move on to sales volume. As most brokers used this latest equity rally and countertrend pickup in activity to call for a bottom or recovery, you must use caution when analyzing month-to-month trend changes in a seasonal market. Instead, you should compare data on a year-over-year basis or seasonally adjust the data. In May, I did a piece discussing this exact topic and showed you a graph going back 10 years that looked at NUMBER OF SALES by quarter - in an attempt to analyze how the first half of 2009 would compare to previous first halves of the year over the last 10 years. While brokers discuss the pickup in action on a month to month basis, which is true, the bigger picture tells a different story and todays Q2 report confirms this. I estimated that number of sales for Q2 would come in around 1,700 - 1,800 or so, which would put the first half of 2009 as 'the most sluggish in the past 10 years'. The report notes that y-o-y sales volume plunged 50% - and Q2 2008 sales totaled about 3100. That would mean Q2 sales came in lower than my estimate and closer to 1,550 or so. I cant find an exact number in the report, but will do a separate piece on this in a few days - clarifying the bigger picture. Now, what this report doesn't reflect is the last 7-9 weeks of action that occurred. Whether you like it or not, whether you are a perma bear or perma bull, we must be able to accurately discuss what is happening out there, without bias or agenda, BUT take into account what we just went through and how the macro economy may or may not affect our market in near term. I expect the countertrend pickup in activity to level off soon, and this market to slow down a bit as we enter the normally slower summer months - seasonality at play, nothing more.

So Your Dog Wants to Live in a Co-Op?

2009-07-01T14:42:32Z

(Christine Toes here) About 15% of Manhattan co-ops don't allow pets. I think by now everyone knows that if you have one dog, two dogs, or (god forbid) three dogs, your chances of finding a Manhattan apartment decreases dramatically. Finding a co-op building that will accept your dog is charted below in order of difficulty: 1. Dobermans, Rottweilers, Pit Bulls, or any other "aggressive breed" dogs - you're pretty much screwed. Maybe 10% of Manhattan co-ops will take you. Tip: Focus on new condo buildings that haven't already established their pet rules yet. Try to get grandfathered in somewhere! If your budget/tastes are more "co-op" in nature, take your dog(s) to the best trainers in Manhattan and make sure they have a very nicely written reference letter from obedience school. 2. More than one "large" dog. Generally this is defined by "over 40 pounds." Tip: look at condos or try to buy when your dog is a puppy. The vast majority of co-op applications ask for the breed and weight of your dog. Hope that no one notices that you listed in the co-op application that it was a 40 lb golden retriever, in which case the board is likely to suspect that your dog is going to one day exceed 40 lbs. I would wager that about 40% of co-ops will not take two or more dogs over 40 lbs. (Some buildings will take one dog over 40 lbs but not two). 3. More than two pets. Some buildings restrict owners to having only one or two pets per apartment. This is one of those situations where having a real estate broker who will call every single listing agent for you to confirm that having more than two pets is ok will save you a LOT of time. 4. Some co-ops don't provide a weight restriction but you have to be able to carry your dogs through the lobby. There are other buildings that only take dogs under 25-35 lbs. Some buildings don't take dogs at all. Some buildings will make you take the service elevator with your dog. Some buildings will want to interview your dog. More on that to follow. Tip: Do not trust statements like "pet friendly!" in listing descriptions. Sometimes "pet friendly" means the building allows CATS (birds, etc), allows ONE pet, allows SMALL dogs, etc. Your real estate agent will likely need to confirm with every listing that your situation is ok. The next step once you find an apartment that you love in a building that will take your dog(s) is to find out if the building interviews pets. This is becoming more and more common. All it takes is one yappy dog that won't stop barking when the owner leaves, a dog that "goes" in the hallways, elevator, lobby, Rhodedenrum just outside of the building, or dogs that growl at other dogs, people, or kids, and the board has to start interviewing everyone's dogs. Interviews, really? What happens at a doggie interview? I asked other brokers and buyers to share their stories and here is what I found... Someone on the board may bring their own dog to the interview to see how your dog interacts with their dog. A board member may go in and out of the apartment door to see if your dog barks when someone gets off of the elevator or passes by the apartment. They may speak in a really loud tone and clap their hands to see how your dog reacts. One board-member swears that a buyer must have sedated their dog for an interview! The dog was really sweet and quiet at the interview but was a non-stop barker from day one. What if I'm buying a pied a terre? Do I really have to fly my dogs up for an interview? Sometimes, yes. It depends on the board. If they waive the interview for you, are they going to have to make exceptions for everyone else? Sometimes these issues are more about whether you are going to be a team player and respect the board's rules. However, if the dogs really aren't going to be there for more than a few weeks a year and they meet the board requirements, some brokers say to not mention them. You can always say you've inherited them or adopted them at a later date. As long as dogs are allowed, your dogs are "regulation" size and breed, and they're well-trained, chances are that no one will care. It's usually only when someone's pets are a problem that it matters. Getting Your Pooches Approved: It never hurts to put a reference letter for your dog into the co-op package. Include reference letters from a trainer, dog walker, boarder or neighbor regarding how well behaved Rover is (doesn't bark, is potty trained, loves kids, plays well with others, etc). Have your dog groomed, make sure he or she is well rested, has been fed, and has gone to the potty before the interview and you'll be just fine! Out of Town Buyers & Getting Dogs to the Interview Dogs under 20 lbs can usually go on an airplane with their owners. Over that, they have to fly as cargo and dog lovers really don't trust their dogs to the airlines. If they can't always get your luggage where it needs to go safely... Are your dogs going to be safe? If there are dog owners on the co-op board, they should hopefully understand that you don't want to drive your dogs from California or wherever just for a co-op interview. Add a cover letter to the package explaining the situation. Or video tape the dogs interacting with kids and other dogs and include a dvd in the board package. IF the board has no sympathetic dog owners, you might have to get the dogs there for the interview. Perhaps try a service like http://petairways.com/ Best of luck, happy hunting, and woof, woof!

Quick Manhattan Snapshot: Market Pricing OUT Fear

2009-06-30T15:26:44Z

A: I have been too busy to blog lately, which is nice of course, but wanted to give a quick snapshot of what I see out there - take it as such, a quick snapshot of what I see out there. Basically what has happened over the course of the past 2-3 months is an acceleration of activity from the March lows, as this market priced OUT Armageddon. Strange to hear it that way, but basically that is what I see happening. I see deals happening at slightly higher levels today than only 3-4 months ago because of the shift in both buy and sell side confidence - leaving out whether this shift is warranted or not. Does that mean a new sustainable bull market, of course not. It means we went through some extreme times, and the market is adjusting and equalizing. While every price point has been affected by this crisis and trading in their own unique ranges down from peak, it seems transactions taking place over the past 7-9 weeks are not as pressured, or 'fear based', as those that took place in February and early March when fear was highest. The shift in psychology from fear to reflation/confidence is responsible; and a 40% equity rally from the lows + a wave down in prices helped that shift to occur. Looking at inventory trends, you can see this shift rather clearly. Don't forget though, the fear months will close first - so we will have to wait 2-3 months to see the 'less pressured' deals I am referring to here. Contracts continued to be signed and you may have noticed some listings on your radar exit the active marketplace. Combine this activity with listings taken off the market for seasonal reasons, and you see a notable reduction of active inventory over the past 2 months. Take a look at Manhattan Active Inventory trends both before and after the March lows and know that there was a bit of a lag for the confidence and action to get going - mid April to mid June were noticeably active and the trend started to reflect this in early May: Now, you must keep in mind where we came from and understand that very few trends go in straight lines forever. There are blips, bumps, corrections, retracements, and countertrend surges - all in the way natural markets behave. To ignore the increase in inventory and only concentrate on the last 2-3 months to build a sustainable bullish argument, is flawed. Always look at where you came from. Nevertheless, this market seems to me to continue to be active and I can see this trend continuing for a bit longer before we head into the normally slower summer months! Time will tell how this summer compares to previous ones, considering how different this year has become - I am referring to a wave down in prices that most thought impossible only a year ago. Here is the trend in contracts signed, at a lag of course, that is displayed as a weekly average so to avoid the spikiness that comes from little to no data updates over the weekend. You could clearly see the pickup in activity that was discussed here months ago: I would expect confidence to continue to mirror the equity market and major headlines moving forward, on top of seasonal changes in activity for the 2nd half of the year. Should you see a deep correction in stock prices, expect to see activity dry up again for our local marketplace. On the flip side, should stocks continue the rally and surge, sellers will be less motivated to hit a low ball bid (unique financial circumstances aside) and I'm sure brokers will continue to benefit from a ready, willing and able buyer pool - lets see how sellers, appraisers, underwriters, and co-op boards react. Predicting a shocking event or a systemic risk at this point in time, seems dangerous given the path taken by the fed and government. This is evident in the fall of the VIX to its lowest levels since Lehman's collapse - a lower VIX means fear is subsiding and traders view this as a contrary indicator (a low vix may mean complaceny sets in, while a high vix may mean fear is peaking). How long it lasts is another story as the markets seem to be pricing in a V-recovery and not a deep, prolonged, or W-double dip recession possibility - will the market be disappointed if data doesn't come in to support this? For those trying to Price In Downturn Risk right now, you are probably finding it harder than you previously thought; especially if you were seriously bidding in the fear months of February and early March! When fear was high then, pricing in future downturn risk was easier to get away with as sellers desperately hit bids after 4 months of severe illiquidity / stocks falling to lows / and systemic risk high. But today, with the market pricing out Armageddon and total collapse, I'm sure you will see deals happen at higher levels than what units in contract 2-3 months already are closing at now from the fear months - the lag of property transactions at work. Strange and interesting to see how Armageddon discovery comes first and whether buyers will consider those deals outliers or the new baseline for future bids. Don't forget, that while the buyer dictates the value of any property at any given point in time, it is the seller that must sign off on it. Therefore, you can't discount the psychology changes that came on the sell side as well as the buy side, as traffic heated up and bids started to come in at stronger levels. For me, I still focus on the buy side as a gauge to current marketplace health. With that said, let me be perfectly clear that this market is not a frenzy like it was in early 2007 and deals continue to be had at the noted range discounts discussed here previously for each price point - albeit closer to the lower end of that range now that Armageddon seems to be priced out of transactions. Interesting times indeed and remember, don't look in the rear view mirror if you want to look ahead. And don't analyze a seasonal market by focusing on month to month changes! When Q2 data comes out in the next few days, expect a significant tick UP in contracts signed from Q1 to Q2 but a drop in closed number of sales on a year over year basis! Because of the lagging nature of our markets from contract signing to closing, we could see a rather bullish Q3 sales number down the road - reflecting the active market from mid April to present! Its the sustainability of this activity that I call into question and as we get deeper into the summer, I would expect things to quite down a bit again in line with the seasonal nature of our marketplace.

New Development Offering Plans & "Special Risks"

2009-06-30T14:50:04Z

(Christine Toes here) When reviewing a condo offering plan (a huge document that, when accompanied by its amendments, explains basically everything about a building), one of the first sections your attorney will visit is the "Special Risks" section. The good and bad thing about this section is that the developer must disclose every single possible thing that could go wrong in order to make the Attorney General's office (A.G.) happy. A few things to look for: 1. Chances are only the first $100K of your deposit on the contract for the apartment is FDIC insured. 2. Sponsor retains voting control of the condo board, often until 75%-95% of the building is sold. Sometimes they can waive control of the board prior to that time. After a certain % of the building is sold and the condo board is formed, the sponsor may be able to have more than one vote on the board or appoint more than one representative. 3. As long as the sponsor still owns (for example) 25% of the building (or up to 5 years after the first closing), the board may not be able to make any material changes to the common areas, change employees, enter into contracts for work/services, borrow money on behalf of the condo, or exercise a right of first refusal UNLESS these changes are required by law or the condo's insurer or are approved by the sponsor. 4. Most buildings don't establish a reserve fund for the building (most or all of the building's systems should, in theory, be new) but they do require approx two months common charges to be put into a reserve fund by each buyer at closing. 5. Some buildings require the condo board to buy the super's unit and the costs are rolled into the first year's budget. Others require the buyer to pay for the unit out of pocket, which could be $10K - $25K in extra closing costs! Some buildings rent the super's unit to the condo and at a later date, sell it to the board. 6. Purchasers should be aware that the amenities and the full building staff (doormen, porters, etc) may not be in place in the building after closings begin, sometimes for a year after closings start. The hours and dates for move in may be restricted because of construction. 7. Construction may be noisy and messy while work in the building is being finished. 8. Real estate taxes are estimates (frequently estimated by the sponsor's tax attorney) and may change (New York City can come up with their own numbers). 9. Pay attention to what can go into the commercial space in the building. Sometimes the commercial space may be banks, bars, parking garages, theatres, spas or commercial office space. Usually there is a promise that nothing "obscene or pornographic" such as an "Adult Physical Culture Establishment" (I'm translating this to mean "strip club"?) will be in the common space. Sometimes they also promise that no abortion clinics or family planning establishments or dry cleaners will be in the commercial space. One Gramercy area building neglected to tell buyers that a McDonalds would be going into the commercial space. 10. Sponsors usually reserve the right to rent out unsold apartments and may be able to rent them out as short term furnished rentals. 11. Buyers frequently can not "flip" their units until at least one year after the first closing. 12. Window treatments may need to be white on the window side of the building to promote architectural unity. 13. Check for "lot line" windows and whether you would be required to pay to brick them up should another building go up next door. 14. Check to see how much over budget the sponsor is allowed to go (sometimes by 25%) when it comes to common charges; Always plan for the worst. 15. Check to see how late the sponsor can be on delivering the building (sometimes a year after the closings are projected to begin) before you can pull out of the deal. Toes says: Make sure your landlord is flexible on lease extensions! Other items to keep an eye on: Check whether labor mentioned in the budget is union or non-union. If the budget calls for union labor, assume that the common charges will be a bit higher. What building systems / mechanicals have been updated? No matter whether it is a ground up building or a conversion, find out what warranties are in place on the roof, boilers, elevators, etc. (Note: The appliances in your apartment should be under warranty.) Frequently, any major repairs needed on terraces that are not the fault of that unit owner are divvied up between ALL unit owners. You may be charged a fee (example, $150) to clean the interior and exterior of your windows twice a year. Sometimes after the first few years of being members of a building's "Club" or "Spa" for free, the unit owners will be responsible for paying fees through increased common charges. Doublecheck how the square footage of the apartment is measured (i.e. are the common elements of the building included in the square footage?) Toes says: I can't underscore enough how important it is to hire a NYC real estate attorney. You want to hire someone who has seen hundreds (if not thousands) of NYC condo offering plans and knows what to look for. And you want an attorney who knows how to amend the contract / structure the deal so you are protected against whatever issues arise.

The Beav Gets Creative

2009-06-29T22:12:10Z

Just a quick update on the William Beaver House, which we discussed in a piece a little while ago as exemplifying the difficulties of downtown developments in the current environment. Last week Business Week did a piece on a new innovative approach to attracting investors to purchase some of the inventory of new condominiums that has piled up in certain markets, including those at William Beaver House downtown. Real Estate broker Roger Nino is being credited with applying "Master Lease" structures to this task. In a nutshell, the sponsor deposits funds representing a couple of years worth of rental income in an escrow account to be paid to a prospective income oriented investor buying a new condominium. Additionally, the sponsor either rents or promises to rent out the unit for the investor. “The investor doesn’t want to take a chance on what the rent could be,” Nino explains. “It’s an interesting mechanism that helps you deal with the uncertainty.” So there you have it, add "Master Leasing" to the list of incentives including "Price Protection" and "Rent to Own" that condominium sponsors are trying in order to address construction loan maturities. I would not be surprised at all to see more sponsors adopting this technique.

Commercial Real Estate - Chasing the Ball Downhill

2009-06-28T16:15:07Z

The sale of One Worldwide Plaza,at 8th Avenue and 49th street, reportedly fell through for the 3rd time last week. It is perhaps a metaphor for the commercial real estate market as a whole. The building was purchased by Harry Macklowe from Blackstone near the peak of the economic expansion and commercial real estate transaction bubble, when they were flipping Sam Zell's Equity Office Property portfolio. There have been a couple swipes taken at this apple. The latest was a second offer by George Comfort & Sons and real estate private equity firm RCG Longview to buy the building using financing from the original lender, Deutsche Bank, which would have retained a stake in the building. The reasons for the deal falling apart are only speculation at present; Deutsche Bank was said to be the one who pulled the plug, unhappy with the rumored mid-$300 per square foot valuation. The building is said to be as much as 50% vacant. So while this appears to be a case where a bank is reluctant to take a mark on an individual property, that might also impact the value on its books (and others') of similar properties, it seems to be somewhat feudal when one considers the macro picture in commercial real estate land as illustrated below. This chart was lifted from Calculated Risk. It shows the Case Shiller residential home price index overlayed by the Moody's/Real Commercial Property Index (CPPI). I think it speaks for itself, but to put it simply, it shows that the commercial market appears to be going the way of the residential market, but with a lag. Importantly, the latest click on the Moody's CPPI showed a decline of 8.6% in April, the largest recorded so far in this down cycle. Commercial Real Estate News quotes Moody's as suggesting that "Large price declines may act as a catalyst to cause the bid-ask gap to narrow, which in turn may lead to an increasing number of transactions." Okay, so nothing new here so far that hasn't been covered by others. I would aver, though, that the seeming similarity in the glide slopes of the residential and commercial real estate market downturns is unlikely to hold going forward. The commercial market is likely to decline much more rapidly than the residential market, once the barf-out gets under way in earnest. I just have a couple comments about why the commercial market is different than the residential market and why I see a step function change in prices. The residential financing environment has been bolstered by the government's cushioning of lending through: 1) The takeover of Fan & Fred, making implicit the assumed federal backing of their guarantees. 2) Fed purchases of Fan & Fred paper, which are keeping mortgage spreads from blowing out. 3) The demographics of household formation, which despite the loss of romanticism in making home purchases and the negative impact on household formation of the economic downturn, inevitably increases demand and bolsters residential property sales if the rent vs. buy equation tilts in the right direction. (We have discussed previously on Urban Digs, why we think housing formation is actually linked to the housing market in so far as so many jobs were produced by the housing bubble and so much immigration was induced by these job openings). In comparison to the above, the commercial real estate market is currently characterized by a complete collapse of financing. The CMBS market, which was responsible for roughly half of the commercial real estate financing market and a larger percentage of the "big deals", is dead. The one corner of the lending world that has not been decimated by residential real estate losses thus far has been the smaller savings banks and savings & loans. These institutions, while technically still very well capitalized, are likely to experience a sudden and extreme pressure on their capital bases due to the ballooning losses in commercial real estate. Unlike the residential world, where new customers are created constantly, the commercial real estate world has no inherent growth in its investor base. Yes, new funds have been raised to take advantage of distressed real estate sales, but many argue that the equity available is still not large enough to absorb all the bad debt. Think of it this way: if there was 75% LTV debt available in the bad old days to buy a $10 million building, the debt outstanding is $7.5 million. Fast forward to today, where it is very hard to get debt at all with LTVs of only 50 - 65% available from a bank depending on property type. On a straight sale of the property at the value of the debt, a buyer would require $2.6 million to $3.75 million in cash. For note purchases LTVs are down at 50% or less and the debt available is very expensive. Instead of the $2.5 million of equity originally used to buy the building - a buyer today would have to either put up 100% of the equity or go to a private lender and take a 50% LTV loan with a 14 to 16% interest rate. So even if the debt on our theoretical $10MM property sold for 50 cents on the dollar, you would be putting up $3.8MM in cash. Or if the buyer were willing to go with a private lender they could keep their equity outlay down to $1.9MM, not much less than the equity originally put up by the defaulting borrower. The combination of equity losses to be taken by the commercial real estate industry coupled with the un-availability of leverage to make purchases and the large volume of bad debt to be dealt with suggests only one thing.....much lower prices. Interestingly, I recently took a client to visit the workout department of a NYC-based bank. The bank personnel were very polite, but assured us that they would not be selling debt at big discounts to face value. As we discussed property valuation, they cautioned that if we did lots of cash flow modeling, etc., we would probably never buy one of their discounted notes, because the numbers just wouldn't work. To keep the dialogue open, my very savvy clients replied, "that's okay we are location buyers"....as in we are willing to pay for future upside to the location in land value or rehab results. But of course, those things can be modeled as well. So essentially, what the bank was telling us and themselves is that they were looking for irrational buyers, who would continue to pay irrational prices....and without the enticement of cheap debt. Maybe they consider their core borrowing customers of old to be stalwart in this environment. I personally would not be making that bet. Bids are due for the re-auction of One Worldwide Plaza July 15. I'm betting the price will not be improved much if at all.....of course, terms and conditions will be opaque, so it is never easy to really understand why the current deal is going south or why a new bid is better or worse. The bottom line is today's buyers are likely to be utilizing significant amounts of cash, and to get the double-digit IRRs they look for and promise their investors, purchase prices will have to be much lower (and going-in cap rates, much higher).

Jonathan Miller Podcast w/ Noah Rosenblatt

2009-06-26T15:04:10Z

A: I had the pleasure to be a guest on Jonathan Miller's Housing Helix Podcasts earlier this week that is now published. This is the first of a few appearances I'm told, so hopefully I get another invite back in the future! This interview was mostly about me, as a person and entrepreneur (thats right, I have been technically self-employed since I graduated college), and how urbandigs got started, about how I got into trading, a little about my first website venture (www.hotspothaven.com), a little about national housing markets, a little about how change is a coming to our local marketplace, a little about the fed and its money printing policies, and a little bit about the natural order of markets. We stayed away from the future of UrbanDigs 2.0 and the current state of the Manhattan marketplace, sorry, but hopefully very soon I will be invited back with no attachments to any employing brokerage to discuss these things in great detail. Anyway, I hope you enjoy and check out the bottom of this post to see what UrbanDigs was originally going to be!

DID YOU KNOW?

Did you know that UrbanDigs.com originally was designed and modeled in early 2004 to be a replacement for the NY Times Search Directory? I bet you didnt! Originally, my goal for UrbanDigs - before I got my re sales license in June 2004 - was to become the new and improved MLS system for NYC real estate! I had the designs all made out but startup costs were too high and I couldnt get anyone to give me money to launch it. You can see the mid 2005 dates on the image below, as this design was like the 5th revision to the idea that started about a year earlier. Here is the model of what UrbanDigs originally was to become, before I decided to make it a blog and did my first post later in 2005 - notice the model derived from the hotspothaven.com search engine design (view larger image)! Funny isnt it!

Wall Street Salaries Rising

2009-06-24T15:36:38Z

So I'm still banging away on research towards a piece on Wall Street employment and compensation. But I'm going to steal a little of my own thunder to get info to you in a timely way. I have had some recent conversations with friends from the street and what I am being told is now being confirmed in a Bloomberg article entitled "CitiGroup Plans to Raise Salaries by as Much as 50%":

Citigroup Inc., the U.S. bank that got $45 billion of government funds, will raise base salaries by as much as 50 percent to help compensate for a reduction in annual bonuses, a person familiar with the plan said. The biggest increases will go to investment bankers and traders, said the person who declined to be identified. Workers in consumer banking, credit cards, legal and risk management will see smaller salary adjustments.

No you are not hallucinating. Due to the restrictions on compensation for those banks accepting TARP funds, banks and brokers are raising salaries in order to hold onto their employees who will no longer be receiving large year-end bonuses. One friend of mine told me that "The sell side is raising salaries (to retain people and because "bonus" is a 4-letter word so that's a way around it." According to the Bloomberg article, C "will raise base salaries by as much as 50 percent to help compensate for a reduction in annual bonuses." Bloomberg goes on to list Morgan Stanley and UBS as firms that have already boosted salaries. I am told by additional contacts that other banks are following, Bloomberg mentions B of A as well. I am told that hedge funds in general continue to reduce headcount and that high water marks that have not been exceeded will significantly impact bonus pools. The net of these trends is a positive for lower value residential real estate, which Wall Streeters will feel comfortable buying, but tough on those multi-million dollar penthouses, which will be out of reach for many. This is NOT wage inflation, this is a substitution of a small increase in base pay to replace potentially large bonuses. Also, it increases banks' fixed costs but reduces variable cost growth in booming times. Not a great recipe for bolstering banks' bottom line should tough times return. While it is unclear the extent of the limitations on employee compensation will be after regulatory reform, it is likely that we are moving from a 'multiple of salary' bonus environment to one where employees will get a percentage of their salary in compensation. Net net, it seems to me that overall compensation is clearly going down. I'm a bit verklempt. Talk amongst yourselves. Here, Ill give you a topic. A wall street bonus is neither a wall or a street...discuss!

Fed Day

2009-06-24T14:21:01Z

A: Markets will be very slow until 2:15PM when the fed will announce their NON MOVE and issue the more important accompanying statement. No way the fed raises rates. Expect ZIRP for at least another 2-3 quarters until unemployment shows signs of stabilization. Things to look for in the statement: 1) any verbiage on future purchases of MBS, up to $1.25Trln in MBS and $200Bln in agency debt - extension of quantitative easing policy 2) any verbiage on future Treasury purchases, up from the $300Bln they announced already - extension of quantitative easing policy 3) any verbiage on signs of economic stabilization - dont expect the fed to say anything about growth given the near term uncertainty 4) any verbiage on inflation - doubtful if we see anything here other than the 'subdued' remark from last time, deflation is still the bigger threat 5) any verbiage on downside risks - perhaps a change, but doubtful. Watch out for pace of contraction statements that may actually buoy stocks 6) any verbiage on household spending, saving or net worth changes This statement will likely have a bigger impact on the US dollar and dollar denominated plays such as metals and oil, then the overall equity markets. Just my opinion. Yours?

Prime Jumbo MBS Downgrades From 1998?

2009-06-23T20:49:03Z

A: Hat tip to Calculated Risk for bringing this one out to people's attention. Umm, one would think that the real questionable prime jumbo loans (at the height of the credit boom) were issued between 2005-2007 or so, before the securitization market decided to go the way of the dodo bird. To hear that we are getting downgrades on '102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004', makes me wonder how deep this problem goes. Where were these guys marked? Oh what a tangled web we weave. You may wonder why some of the holders as far back as 1998 may be defaulting if they saw the equity of their home skyrocket with the housing boom. Well, the answer to that would be MEW. How much did the homeowner cash out during the boom, and how did the subsequent fall in prices kill the LTV ratio for the homeowner? We all know how people used their homes as an ATM machine for at least 3-4 years, big time! Now the house is worth less, yet the debts remain. Couple that with this severe slowdown and rise in unemployment and pressure has been building on these once 'high quality' borrowers. Prime Jumbo and the rest of the stuff sitting lord knows where on the banks balance sheets (helocs, credit cards, lbo's, commercial mbs, etc..), are all part of my concerns over a 2nd wave of writedowns, capital raising, activation of the planned toxic junk-disposal programs, etc..Just be prepared thats all. The banks raised a lot of money with this equity rally, and got some earnings behind them from Q1. This could help capital ratios and TCE for a bit longer. But ultimately we will have to face the music on the higher quality debt classes and other types of debt that are still sitting there, rotting away. From Marketwatch.com, "S&P downgrades prime jumbo mortgage securities":

S&P said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals. "The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement. Prime mortgages were originally thought to be less vulnerable to housing cycles. Home loans offered before 2005 -- when the lending binge really took off -- were also considered more solid. But the rapid increase in unemployment has undermined these assumptions.

Careful about that complacency thing setting in that this credit crisis is over.

Nenner: Deflation Now, Inflation Later

2009-06-22T14:39:07Z

A: Charles Nenner is out today with a call that the deflationary episode is not yet over, and still has to run its course. Meanwhile, he discusses how inflation will kick in down the road (18 months) and continue in an 'upcycle' for about 30 years. I have to admit, I am in a very similar camp as Nenner in terms of another wave of deflationary pressures before the true inflation cycle begins. Charles Nenner, founder of the Charles Nenner Research Center, discusses on Yahoo Ticker:

Renowned for his cycle work, Nenner sees deflation remaining dominant until year-end and inflation not picking up for another 18 months. But that will be the start of a 30-year (yes, year) upcycle for inflation says Nenner, who spent 12 years as a market-timing consultant for Goldman Sachs. Nenner believes the "deflation trade" is about to reassert itself in the short-term, meaning strength in the dollar and Treasuries, and weakness commodities and equities, as we'll discuss in more detail in a forthcoming segment. For those who believe the dollar is doomed, Nenner notes "all currencies are bad." In other words, currency trading will be a game of relative bets vs. a one-way trade against the greenback, as so many expect.

Nenner did discuss the deflation 'scare' in late 2007. Here is a question for you: Q: If the fed continues with a Zero Interest Rate Policy, stimulus everywhere both monetary and fiscal, tons of credit facilities and programs to recapitalize the banks, bailouts galore, and pure QE money printing to the tune of trillions of greenbacks out of thin air, then WHY oh WHY won't there be hyperinflation, or at least inflation in our immediate future? This is a question many people ask me, as if I am omnipotent or something. I'm not. But I do have my views on this topic, like most people. Fact is, YES, the fed is printing trillions of dollars and stimulating like mad, and you can see the surge in the adjusted monetary base - but that surge is mainly sitting idle in excess reserves. Thats the thing. Our fractional reserve system of banking, with its money multiplying debt creation effects, is not operating normally and very rightfully so. If you have trouble grasping this concept, that the newly created money is not entering 'the system' so to speak, think of it this way: the money that Helicopter Ben is printing and dropping from the air is caught in an updraft and circling high above us! Its not hitting ground where we all pick it up and go willy nilly spending it. This is evident in the plunge in the velocity of money, that I discussed back in January. Fact is credit is contracting, HELOCs are being cut, loans are harder to get as underwriting standards have tightened, the shadow banking system saw hundreds of billions of lost wealth, trillions of lost wealth from housing and stock market collapse - does any of this sound inflationary to you? No. The main reasons why the feds printing and stimulus wont produce hard core inflation right off the bat, include: 1) The deflationary episode we are in will negate any inflationary effects for as long as the system takes to delever, restructure, handle bankruptcies and failures, write down toxic assets, and destruction of bad debts through defaults - this is ongoing and WAVE 2 still lies ahead of us 2) The feds hundreds of billions of money printing is sitting idle in excess reserves and not being lent out - this is what is keeping the multiplier effect of our fractional reserve system muted. Recall that the fed requested and received authority to pay interest on excess reserves last September, and since that approval came in, boooooom, excess reserves started to surge. The reason the fed did this was to sterilize their stimulus and money printing policies so that the banks had an incentive to keep that money sitting idle instead of putting it to work through new loan creation that could have sent the system overboard in terms of credit creation and inflation. Plus, the fed knew the banks needed to recapitalize and still had loan losses and toxic assets improperly marked that needed to be taken care of. Recall Jeff's statement on excess reserves in January: "My guess is that these excess reserves will be melted away as banks absorb losses on delinquent loans and as marked down securities see their income streams actually collapse." 3) Credit is contracting! Mish is all over this and a believer that money supply contract/expansion and credit contraction and expansion play a major role in the definition of inflation. In short, you cant have hyperinflation if credit is contracting! I tend to agree 100%! 4) Destruction of credit is greater than money creation - think of Printer Ben pouring hundreds of billions of newly created dollars onto the ground, except, there is a huge hole in this ground that represents the destruction of hundreds of billions in credit. This money is not piling up on the ground, ready for people to take, because it is falling into the big hole, not to be seen! These are the main reasons why I dont see inflation as a threat right now, or even in 2010. Yes, we are seeing a stimulus induced reflation trade that people are building foundations of hope on. Not me. I am still cautious, will continue to ask questions about the stuff sitting on balance sheets (off and on) and the accounting tricks that allowed things to get covered over, and I am less bearish than I was in late 2007 before the process really got going. At least now it is happening and we felt a great deal of pain already, which tells me we are on our way to get through this mess that our system created! But, its hard to solve a debt deflation problem with more debt and accounting tricks. Hence my caution. Sudden Debt has a great piece out discussing how the boom during the past decade was really a 'debt fueled' unsustainable growth period:

This blog's position has always been that the US economy's performance post-2000 has been due to ever-increasing assumption of debt, particularly by households to finance real estate purchases and personal consumption. I don't think anyone can dispute this any more: just look at the chart below. Debt kept accelerating while GDP remained "stuck" at around 5% annually (these are nominal figures). In the end, the debt boom created its own bust and dragged down the entire economy. Cement shoes come to mind... We are now deep in a debt-bust crisis and it is the first time since at least 1953 that household debt is decreasing in absolute numbers, year on year.

Interesting stuff. My stance has been deflationary since early 2008, and prior to that I used statements such as 'housing deflation + commodity inflation' to discuss the pressures facing our national economy. I still expect another wave of deflationary forces before this cycle is done that will be triggered by pressures from cmbs, helocs, prime, jumbo prime, credit cards, lbo's, types of holdings. I am not sue when this will hit, or if it will be as severe as the first wave that we went through, but I think it's something that needs to come and go for us to get through this cycle. This is not your ordinary recession and there are no free lunches. Any inflation that does show up at first will be in the form of higher food, energy, metals, commodities, health care, types of costs. Basically the stuff we need to live will see the first wave of inflation and it will be the form of inflation that squeezes consumers wallets and pressures corporate margins, at first. The policy makers will have to shift their policy to combat this form of inflation and that means higher rates. The cycle's endgame in full effect. Of course this has not happened yet and is only my opinion on the topic. Because of the nature of what we experienced, how the world has changed, I do not see inflation sending house prices surging. But it should kick in at some point down the road to help stabilize the downfall. I think Nenner might be on to something here. A touchy topic I know, and one I would love to hear your thoughts on.

NYC Unemployment Surges

2009-06-18T23:02:14Z

I have been promising a piece on financial sector employment, which I am working on. In the course of that work I've been collecting some data from the New York State Bureau of Labor Statistics....which may give me carpal tunnel syndrome before all is said and done. But I happened to have called James Brown at the New York State Department of Labor's Manhattan research office to ask some questions about available data and to get some preliminary comments on trends this morning. He told me "We see continually widening job losses and no indication that the losses are stopping". He also gave me the heads up that the latest data would be out yesterday, so I should keep my eyes peeled. Well here it is: The state's unemployment rate reached a 16 year high in the month of May, with the number of unemployed exceeding 800,000, which is the highest in 33 years. The data above and the chart below (from the New York Fed) show that New York City, which going into this recession was growing faster than the rest of the country and held up better in the initial stages of the recession, has now started to catch down to the State of New York and the country overall. (Interestngly, this seems to be in keeping with the last recession). A year ago, in May of 2008, the city's unemployment rate sat at just 5.1%, trailing the state by 10 basis points and the country by 40 basis points. By April of 2009, unemployment in New York City was running 60 basis points above the rest of the state (sans NYC) at 8%, but still trailing the rest of the country by almost 1 percentage point. In the month of May, unemployment in New York City surged a full 100 basis points to 9%, more than three times the increase of the rest of the state (sans NYC) . The big surge in May can't be viewed positively and of course accelerating unemployment is not good for residential real estate prices. There has been some debate lately about whether job losses in New York City will actually be a fair amount lower than the worst expectations of a few months ago, due to the federal bailouts of the financial industry. Urban Digs readers know that for trading markets, results versus perceptions are quite important and the second derivative of change...even if its only "less worse"...can have a big impact. However, in the real world absolutes matter and the latest click on New York City unemployment is absolutely not a good thing, even if expectations were that things could be worse. Stay tuned.